How solicitors can step…
Our strategic partner, Dye & Durham, share how their climate risk modelling reports can empower legal professionals to better advise on conveyancing…
Commercial properties are “non-domestic real estate that fulfils an operational or occupational purpose for business and is commonly sold or let in the market. It may also be referred to as ‘investment property'”.
Other asset classes such as rural, residential, public sector and infrastructure fall outside the remit of this guidance note.
The guidance includes coverage of Minimum Energy Efficiency Standards (MEES) legislation and other requirements.
Whilst MEES refers to ‘non-domestic properties’, the term ‘commercial property’ is used instead in this guidance, as this more accurately reflects the terminology our members use.
‘Green lease drafting’ is drafting that provides for the landlord and the tenant to undertake specific responsibilities and obligations to minimise carbon emissions arising from the sustainable development, operation and occupation of a property.
Green lease provisions can help reduce scope 1-3 emissions (below) from properties.
This can assist in complying with any environmental, social and governance (ESG) or Net Zero strategies clients may have.
The Royal Institution of Chartered Surveyors (RICS) Code for Leasing Business Premises in its lease negotiation and best practice section states:
“Parties are encouraged to include in leases provisions relating to sustainability and the environment that urge cooperation throughout the lease term between the landlord and the tenant to ensure that the property is used as sustainably as possible. These are sometimes called ‘green clauses’…”
Solicitors are also encouraged in all appropriate cases to discuss with their clients whether to include green provisions in leases they are producing and negotiating (see why green leases?).
These could include:
Some clients may wish to use a blend of green lease provisions (see NHS model green lease) to suit their current needs and any plans to increase their climate ambition over time.
The incorporation of green clauses is not limited to new or renewed leases.
Where a lease is already in place, the parties can enter into a memorandum of understanding (MoU) which provides a roadmap for co-operation between the parties on increasing the sustainability of the property.
Currently, it is not common practice for the parties to vary the provisions of an existing lease to introduce new green clauses.
Ultimately, green leases will contribute towards improving the quality of the environment and create a cleaner, healthier and biodiverse planet with sustainable resources for all.
UK government policies are already beginning to oblige developers, landlords and occupiers to focus on the environmental performance and sustainability of buildings (see guidance on MEES).
The UK government has set a legislative target of 78% reduction in greenhouse gases by 2035 and a target to achieve Net Zero by 2050.
According to the UK Green Building Council, the built environment contributes around 40% of the UK's total greenhouse gas emissions.
Further, it is estimated that 80% of buildings that will exist in 2050 have already been built.
The United Kingdom has some of the oldest housing stock in the world. Currently, the median EPC rating in England and Wales is D.
The government estimates that 18% of commercial properties hold the lowest EPC ratings of F or G.
ESG disclosure standards, including the Task Force on Climate-Related Financial Disclosures (TFCD) recommendations, are the most prominent global set of climate-related risk disclosures that have been incorporated into many public bodies as well as regulator policies, including the Bank of England.
Further disclosure standards are also being finalised by the International Sustainability Standards Boards which provide sustainability disclosure standards for financial reporting globally, including specifically on real estate.
The Financial Conduct Authority’s (FCA) Sustainability Disclosure Requirements (consultation paper) implementation timeline is 30 June 2023 to 30 June 2026.
Once implemented, the FCA will require real economy companies, including insurers, and asset managers and asset owners to report on their sustainability risks, opportunities and impacts.
Regulation in this area will likely increase.
It's important for solicitors to keep apprised of current practice relating to green lease provisions so that they can give their clients the opportunity when appropriate to include such drafting in their leases.
In addition to contributing towards a sustainable environment and planet, green leases can help landlords to:
In addition to contributing towards a sustainable environment and planet, green leases can help tenants to:
Both landlords and tenants will also benefit from enhanced protection from climate change transition risks by future proofing their businesses in line with expected changes to climate policy.
While commercial green leases are still being phased into the market, their adoption is likely to rapidly increase with broader implementation of the national sustainability related disclosure requirements.
Therefore, as businesses adopt Net Zero strategies and evolve their ESG policies, the demand for green leases may increase directly and indirectly through broader supply chain demands.
In many cases the biggest impetus to introduce green provisions to leases is the Minimum Energy Efficiency Standards (MEES).
The legislation to create the MEES came into force on 1 April 2018. At the time of writing, the effect of the legislation currently is that:
From 1 April 2023, this rating requirement (of a minimum lawful EPC rating of E) applies not only for the grant, renewal or extension of leases of commercial property but also for the continuation of any existing lease or tenancy of a commercial property.
In each case, where the property has an EPC rating lower rating than E, the landlord will be liable to a penalty unless a valid exemption is registered.
Beyond April 2023, the government currently proposes that staged rises in the required EPC rating for commercial properties are due in 2027 and 2030.
These rises will ultimately lead to a required rating of at least B.
The 2027 and 2030 rises will include a prior 'window' period in which landlords must obtain EPCs and are expected to carry out any necessary improvements or register a valid exemption.
We will update this guidance when details of these EPC rating requirement rises are finalised.
The government estimates that the proportion of rented commercial property that will be required to be upgraded in order to meet MEES standards will increase from around 10% to around 85% (approximately 1,000,000 buildings across England and Wales).
The MEES requirements provide an important incentive for owners to investigate the energy efficiency of their property portfolio.
Local authorities have the power to serve MEES non-compliance notices on landlords and currently the financial penalties that may be imposed under such notices are as follows:
It should be noted that non-compliance is not a criminal offence.
Only the landlord suffers the penalty, so the tenant will not be liable unless it becomes a landlord itself by sub-letting all or part of the property.
One of the ways to avoid penalties is to establish and register one of the statutory exemptions.
The exemptions are:
Exemptions are not automatic, require registration in advance on a government register and need to be renewed at least every five years.
They are also personal to the specific parties, so successors will not be able to rely on an existing registered exemption.
Solicitors acting on transactions involving leases of property should, in all applicable cases, discuss the implications of MEES with their clients, especially in view of the changes taking effect on 1 April 2023.
This may be combined with a discussion about wider environmental issues, including green leases.
Solicitors should, in appropriate cases, draw their clients' attention to the risk of potential changes in:
There are well-known risks from climate change that may directly affect property, such as increased flood risk and coastal erosion, and the tightening of MEES requirements.
However, there are numerous additional risks that might affect the use, occupancy costs or value of a property over the foreseeable future as the UK’s regulatory and legislative agenda shifts to support the transition to a net zero economy by 2050.
For example, it is anticipated that there may be an increase in the designation of areas as ultra-low emission zones and restrictions on the production or sale of certain categories of vehicles.
These can be categorised as climate legal risks (see the Bank of England’s taxonomy of climate risks).
This section is not intended to provide a recommendation of specific green lease provisions, but instead identifies some commonly encountered green lease provisions, MoU and implementation guidance.
We encourage solicitors to examine these resources when developing or reviewing green lease clauses.
Judgment is required as to the appropriate circumstances where particular clauses may be relevant and suitable.
TCLP has published a suite of frequently updated, leading ‘dark green’ lease clauses that are aligned with the Paris Agreement goals and which represent best practice:
These template clauses can be amended by solicitors according to their clients’ needs and sustainability targets.
The climate ambition of provisions can be scaled up over time as client demands shift.
Every TCLP clause comes with “essential notes and guidance” outlining the relevant climate issue, the commercial context and tips for overcoming barriers to use.
Each clause is given a child's name to remind users of the next generation who will benefit most from their use in contracts today.
Aatmay’s clause enables landlords and tenants to reduce unnecessary waste and purchase of new products (and the associated greenhouse gas emissions) by prompting them to follow circular economy principles in repair and alterations and to prioritise the use of reclaimed, re-used or recycled goods or materials, where possible.
The Environment Agency has used the circular economy elements of Aatmay’s clause in drafting its own construction materials supplier sustainability clauses. (See TCLP case study.)
Rosie’s clause requires the landlord to act reasonably and not delay its consent if a tenant proposes alterations that will improve the environmental performance of the premises, the building, or the wider development.
Clauses to give tenants a modest rental rebate for 'green' household management and to give landlords the ability to invest in renewable energy installations while their rentals are occupied.
Lotta’s clause is a relatively low barrier to entry clause that delivers emissions reductions for landlords and tenants by ensuring that electricity supplied to a leasehold property is from renewable sources.
Building on Lotta’s clause, Oisín’s clause provides a series of stepped options for commercial leases that help corporate landlords and tenants generate additional 'green' electrons for the electricity grid where their leasehold property is located.
Hannah’s clause allows landlords to include the costs of improving the environmental performance of leased buildings in the service charge (where such works are not otherwise required by statute).
The BBP has published a free toolkit to enable owners and occupiers of commercial buildings to adopt green lease clauses.
As the guidance is non-prescriptive, it represents more of a ‘light green’ approach to green lease clauses.
The toolkit includes the following:
At the time of writing, the Green Lease Toolkit is being reviewed, and a revised version is set to be published in 2023.
The model short-form business leases we published will be supplemented by optional light-green clauses following the revision of the BBP Green Lease Toolkit (above).
The model commercial lease draft leases have received widespread adoption across the market.
The leases contain a ‘sustainability’ schedule which includes clauses focusing on co-operation, data sharing and consideration of impacts on environmental performance.
The drafting “is not intended to impose onerous obligations in relation to sustainability issues but is intended to facilitate a discussion between the parties about these issues”.
The NHS has published a standalone suite of sustainability provisions that can be bolted on to a new commercial lease with an accompanying MoU and draft set of clauses.
It contains versions of both dark and light green provisions to suit the ambition level of the user.
The Better Buildings Partnership (BBP) is a collaboration of leading property owners who are working together to improve the sustainability of commercial buildings.
The British Retail Consortium (BRC) is a trade association for retail businesses in the United Kingdom.
CBRE is a commercial real estate services and investment firm.
The Chancery Lane Project (TCLP) is a collaborative initiative of international legal and industry professionals whose vision is a world where every contract enables solutions to climate change.
The City of London Law Society is one of the largest local Law Societies in the United Kingdom. The CLLS represents over 16,000 solicitors through individual and corporate membership.
The Royal Institution of Chartered Surveyors (RICS) is a global professional body for surveyors with 134,000 members.
Generally, human made or modified structures that provide people with living, working, and recreational spaces.
The total amount of greenhouse gases (including carbon dioxide and methane) that are generated by actions from individuals, organisations or governments.
A change of climate:
Climate change transition legal risks are risks:
● resulting from to clients promoted by legislative or regulatory changes implemented to pursue the transition to a net zero economy and/or fulfilment of the Paris Agreement’s goals.
In this guidance we use the RICS definition of commercial property: “Commercial property comprises “non-domestic real estate that fulfils an operational or occupational purpose for business and is commonly sold or let in the market. It may also be referred to as ‘investment property’.”
Short for an Energy Performance Certificate, a report that assesses the energy efficiency of a property.
Environmental, social, governance (ESG) was launched in 2006 under the United Nations Principles for Responsible Investment.
Minimum Energy Efficiency Standards, under The Energy Efficiency (Private Rented Property) (England and Wales) Regulations 2015
A state in which the greenhouse gases going into the atmosphere are balanced by reduction and removal out of greenhouse gases out of the atmosphere.
In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.” This includes the conservation of finite resources.
The Financial Stability Board (FSB) created the Taskforce on Climate Related Financial Disclosures (TCFD) to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks related to climate change.